EXERCISE 5–1 Your supervisor asks you to analyze the potential purchase of Drew Company by your firm, Pierson, Inc. You are provided the following information (in millions):

DREW COMPANY Pierson, Inc., Historical Historical Fair Cost-Based Cost-Based Value Current assets................................ $ 70 $ 60 $ 65 Land............................................... 60 10 10 Buildings, net................................. 80 40 50 Equipment, net............................... 90 20 40 Total assets.................................... $300 $130 $165 Current liabilities ........................... $120 $ 20 $ 20 Shareholders’ equity....................... 180 110 —

Total liabilities and equity.............. $300 $130 Required:

a. Prepare a pro forma combined balance sheet using purchase accounting. Note that Pierson pays $180 million in cash for Drew where the cash is obtained by issuing long-term debt.

b. Discuss how differences between pooling and purchase accounting for acquisitions affect future reported earnings of the Pierson/Drew business combination.